ABS, First Corporate Bonds To Trade Electronically


MTS SPA, known for specializing in Italian and German government bonds, has opened its "Telematico" electronic platform to asset-backed securities trading, as a hefty, yet-to-be issued bond from the Italian state pensions agency (INPS) will soon trade on the wholesale electronic market.

The introduction of the asset-backed securities issue - which is split into three tranches, each worth 1.5 billion euros - marks the first time that a corporate bond will be traded in the wholesale market, as a market-making obligation applied to the issue looks to provide sufficient liquidity for trading in the secondary market.

"It is unusual to see a market-making obligation applied to corporate bonds," said Gianluca Garbi, chief executive officer of MTS.

"Because of the size of the bonds, and because of the way the deals are being structured, the issuer asked all of the bookrunners to keep some market-making obligation for a certain period of time," Garbi said. "That will basically transform the security from a one-off issuance, to a security that is also liquid under the secondary market."

Prior to this, he said, corporate bonds in Italy had mostly traded on the stock exchanges or in certain agreement facilities, but the deals were wracked with poor liquidity because of their size and one-off nature.

Now, Garbi said, the INPS issues should not only herald more asset-backed trading on the network as liquidity and transparency grows for this category of bonds, but other non-government fixed income instruments, such as mortgage-backed securities and global bonds, will become part of MTS' Telematico exchange.

Specifically, Garbi sees the mortgage market taking off in Europe, and would like to see deals similar to the "fund briefs" he's seen from Germany trade on the network. The mortgage-related German deals, because of their large size and the regularity of their issuance, have the liquidity characteristics for entry into the exchange.

The INPS asset-backeds have an approximate settlement date of Nov. 30, but should begin trading in the "gray" market this week, Garbi said, in order to "get the bonds trading for the first week or 10 days."

While Monte Titoli will act as the depository on the bonds, an official at MTS said it is likely that future corporate bonds listed on the system will be settled through Euroclear or Cedel, not Monta Titoli. Merrill Lynch, Paribas and Caboto-Gruppo Intesa are bookrunners on the deals.

The deal is significant, said sources, because it must be sold this year as the proceeds have been accounted for as part of the Italian state budget for 1999, and will be needed to keep Italy within the borrowing limits agreed to as part of Italy's membership in the European Monetary Union.